CIU Business School

Principles of Microeconomics
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Amazon.com is an American multinational technology company based in Seattle,
Washington that focuses on e-commerce, cloud computing, digital streaming,
and artificial intelligence. Amazon was founded by Jeff Bezos on July 5, 1994,
in Bellevue, Washington. The company initially started as an online marketplace for
books but later expanded to sell electronics, software, video games, apparel, furniture,
food, toys, jewellery many other things. It is considered one of the Big Four technology
companies along with Google, Apple, and Facebook. There are lots of reason the
company look like as a monopoly competitive firm. In my point of view, Amazon can be
considered as a monopoly competitive firm.

Why I think Amazon can be monopoly competitive firm:

The Book Industry was the first to feel the effects of Amazon. Today, Amazon
controls 75 percent of online sales of physical books, 65 percent of e-book sales, more
than 40 percent of new book sales, and about 85 percent of sales by self-published e-
book authors In 2016, economist Paul Krug man reported in the New York Times that
Amazon had as large a market share in the entire book business as Standard Oil did in
1911, right before it was broken up into 34 companies.

Amazon’s dominance in the book industry forces publishers to deal with the
retailer and its bullying tactics. In one well-publicized fight over e-book terms,
Amazon.com delayed fulfillment of customer orders for many popular books from
Hachette’s imprints in order to get the terms it wanted from the company. The publisher
kept the Internet retailer supplied, but Amazon delayed shipments of Hachette titles and
restocked their titles slowly. Most popular books ship from Amazon within two days, but
shipping times for Hachette books were listed as upwards of two to three weeks. In
another instance, Amazon removed the buy buttons from Macmillan’s titles during an e-
book pricing dispute in 2010.

Amazon’s tactics harm smaller publishing houses, inhibiting new and diverse
voices in the book industry. According to Forbes, Amazon receives an effective
discount of 53 percent from Random House on its books. Part of that discount comes in
the form of "marketing development funds," which Amazon requires publishers to pay if
they want to receive promotion on the site. Big publishers typically pay Amazon five to
seven percent of the previous year's gross sales, while smaller houses end up paying
proportionately more, with the result that smaller houses can be forced to sell their
books to Amazon at a 60 percent-plus discount.
Amazon is using its market power to eliminate competition and take control of one
industry after another, leaving us with an economy that is less diverse and innovative,
and one that affords fewer opportunities for businesses to start and grow.
According to the Institute for Local Self-Reliance study, Amazon’s Stranglehold: How
the Company’s Tightening Grip Is Stifling Competition, Eroding Jobs, and Threatening
Communities, Amazon does this through various means:

Underselling the competition. The Institute for Local Self-Reliance notes in its report
that “Amazon uses its vast financial resources to sell many products below its own cost
as a tactic for both eliminating less well-funded competitors and acquiring customers
into its Prime ecosystem, which sharply reduces the chances they will shop around in
the future.” In 2014, Bob Kohn, a technology attorney and founder of EMusic.com,
asserted that Amazon used predatory pricing to gain an advantage in the book industry,
as reported by CNBC.

Displacing an open market with a privately controlled market. By using Amazon

Prime to corral an ever-larger share of online shoppers, Amazon has left rival retailers
and manufacturers with little choice but to become third-party sellers on its platform; in
addition, half of all online searches begin with Amazon. In effect, Amazon is supplanting
an open market with a privately controlled one, giving it the power to dictate the terms
by which its competitors can operate, and to effectively levy a kind of tax on their
revenue.

Amazon leverages the interplay between the direct retail and platform sides of its
business to maximize its dominance over suppliers. As Amazon extracts more fees
from suppliers, it reduces their ability to invent and develop new products. Meanwhile,
Amazon is rapidly expanding its own product lines, using the trove of data it gathers
from its platform to understand its suppliers’ industries and compete directly against
them. Many of these Amazon products appear at the top of its search listings.

Increasing prices once the consumer is hooked. Already there’s evidence that
Amazon is using its huge trove of data about customers’ buying habits to raise prices.
It’s also started blocking access to certain products, charging higher prices, and
delaying shipping times for customers who decline to join its Prime program.
Pro Publica tested the purchasing options at Amazon and found that, in their tests,
Amazon’s sophisticated shopping algorithm favored Amazon and the sellers it charges
for its services, even if the price is much higher.

Anti-competitive: Amazon dictates terms for its own competitors. By controlling

critical infrastructure, Amazon both competes with other companies and sets the terms
by which these same rivals can reach the market. Locally owned retailers and
independent manufacturers have been among the hardest hit.
Amazon forces competitors to work with it, thereby exercising control over their
competition. Amazon’s dominance cannot be gauged if we measure competition
primarily through price and output. The economics of platform markets create incentives
for a company to pursue growth over profits, a strategy that investors have rewarded.
Under these conditions, predatory pricing becomes highly rational, even as existing
doctrine treats it as irrational and therefore implausible. Second, because online
platforms serve as critical intermediaries, integrating across business lines positions
these platforms to control the essential infrastructure on which their rivals depend. This
dual role also enables a platform to exploit information it has collected on companies
that use its services to undermine them as competitors.

The real cost of a monopoly is not about price, it’s about stifling new business
and job creation. Amazon’s tightening grip is damaging our ability to earn a living and
curtailing our freedom as producers of value. New business formation has plummeted
over the last decade, which economists say is stunting job creation, squeezing the
middle class, and worsening income inequality.

Amazon generates 30 percent of all online and offline retail sales growth in the United
States and controls 40 percent of internet cloud services. Eighty-four percent of U.S.
consumers have made an Amazon purchase in the past year, and most of those
consumers (55 percent) are also Amazon Prime members.